10 Staff Report - FY 2006/07 First Quarter Budget Performance and Status Report*N o,MEETING DATE: 11/06/06
ITEM NO:
tosA~os COUNCIL AGENDA REPORT
DATE: NOVEMBER 6, 2006
TO: MAYOR AND TOWN COUNCIL
FROM: DEBRA J. FIGONE, TOWN MANAGER
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
A. ACCEPT 2006/07 FIRST QUARTER BUDGET PERFORMANCE STATUS
REPORT.
B. AUTHORIZE BUDGET ADJUSTMENTS AS RECOMMENDED IN THE
ATTACHED FIRST QUARTER BUDGET PERFORMANCE REPORT.
RECOMMENDATION:
1. Accept FY 2006/07 first quarter budget performance and status report.
2. Authorize budget adjustments as recommended in the attached first quarter budget
performance report.
BACKGROUND:
The attached Budget Performance Report covers the first three months of the fiscal year
beginning July 1, 2006 and ending September 30, 2006. The report presents analysis and
recommendations related to key General Fund revenues by category and expenditures by fund.
Staff provides to Town Council periodic updates on the status of the current year's adopted
budget revenues and expenditures and the projected financial condition of Town funds,
concentrating on the Town's General Fund. Though financial results are limited to the first
three months, staff is able to provide an update based on early revenue trends for the current
fiscal year, and to advise on potential future revenue and expenditure challenges which may
materialize during the fiscal year.
PREPARED BY: Ja4/-,,/;1,1Way
Finance and Admi 'str ive Services Director
N:\FINANCE\Qtrly Financial Reports\FY 2007\FY 2007 - Ist Qtr\Council Reports\Town Council Ist Qtr Report.doc
Reviewed by: ` Assistant Town Manager Town Attorney
Clerk Administrator Finance Community Development
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PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
DATE: November 6, 2006
In recent years, as part of the state and local government budget agreement, changes to the local
government revenue structure reduced two major revenues dedicated to the Town - Sales Tax
and Vehicle License Fees (Car Tax), but incorporated replacement revenues (commonly referred
as "backfills") to local governments. In addition, Proposition 1A passed by voters in November
2004 provides continuing protection to local governments by disallowing reductions to local
sales tax rates, the shifting of local property taxes from cities, or reducing the vehicle license fee
percentage (0.65%) without providing replacement revenues. However the local property tax
share remains vulnerable because the constitutional protections under Proposition IA also
include provisions that would allow the state to reallocate the local property tax with a 2/3rds
vote of both houses beginning in FY 2008/09. The effects of 2004's Proposition IA, collectively
with Propositions lA&1B (transportation funding) and 90 (government acquisition ofproperty),
should they be passed by the voters on November 7th, may have future fiscal impacts (positive
and/or negative) that are difficult to quantify at this time. Potential impacts will be discussed in
future reports as further information becomes available.
DISCUSSION:
The first quarter budget report reflects a mix of positive news about last year's fiscal results, and
a concern that the recovery in the Town's economically sensitive operating revenues such as the
sales tax, transient occupancy tax, and property tax will be negatively impacted by the recent rise
in energy costs (despite the current fall in gasoline prices from record highs) and by downturns in
the local real estate market. National economists explain that as fuel prices rise, the buying
power of consumers is eroded leaving fewer dollars available for discretionary spending. If this
occurs, then the moderate recovery which appeared to be materializing in the Town's operating
revenues last year and early this fiscal year may be stalled this fiscal year. In August 2006, the
National Association of Realtors reported existing home sales were down 12.6 % from the prior
year. Average home prices decreased 1.5% from the year before. Economists point out that
declines in housing prices tend to have a dampening effect on consumer spending.
Despite the concern about the economy, many economic indicators remain positive. The
Sacramento Bee reported recently that in discussing the upcoming holiday shopping season with
national retailers and analysts, the phrase "cautious optimism" comes up early in every
conversation.
In the FY 2006/07 "status quo" budget the Town conservatively forecasted continuing recoveries
in local revenues, incorporating modest revenue growth in economically-sensitive revenues such
as sales tax, franchise fees, business license and transient occupancy taxes. The FY 2006/07
budget continued funding at current service levels, which reflects prior year reductions due to
budgetary down-sizing. Because of diminished resources and rising costs, staff continues to
examine service level delivery strategies across all Town operations, mindful of the latest Five
Year Financial Plan which forecasts potential revenue shortfalls that begin in FY 2009/10.
Shortfalls are projected to occur if structural changes are not made, or revenues do not improve
beyond their current estimates. Other budget adjustments beyond the forecasted shortfalls may
be necessary in the future due to unanticipated State local revenue "takes" from local
PAGE 3
MAYOR AND TOWN COUNCIL
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
DATE: November 6, 2006
government or unexpected reductions in economically sensitive revenues such as sales tax or
transient occupancy tax.
At the first quarter end of FY 2006/07, revenue trends are tracking in line with projections made
at budget preparation time in the spring of 2006. Expenditures are trending in a manner similar
to the pace set last year at the first quarter, which is good news in that last fiscal year the Town
achieved overall budget expenditure savings of approximately $1.0 million.
Service delivery in FY 2006/07
The current year status quo budget preserved vital Town services at the prior year's levels and
provided a funding opportunity to make some improvements to service levels from the prior
year. One example is the $50,000 increase in the Library's ongoing collection budget (books,
audio, video, and publications) from the $135,000 appropriated in FY 2005/06, to a new ongoing
collection budget of $185,000. It should be recognized that the current year's "status quo"
budget reflects service delivery levels which have been modified and/or reduced to meet reduced
resources. This has occurred through a combination of operational efficiencies, salary savings
from vacancies, strategic staffing defundings, and reductions in overtime, supplies, services,
training, and postponement of equipment replacements.
While avoiding another consecutive year of service level reductions in FY 2006/07, the
reductions carried over from the prior year continue to have effects on operations overall.
Holding vacancies and reducing staffing and overtime results in the current workforce absorbing
more of the workload, thus affecting the capacity to get the work done and limiting the flexibility
to respond to new ideas and/or increased service demands. Response times associated with non-
public safety requests have increased. Parks and public works related maintenance cycles have
been extended or reduced, as well. Over the longer-term, the current service delivery model as
funded in the FY 2006/07 budget strains the organization's capacity to deliver services to the
community, and is not sustainable over the long run without incurring more significant impacts
on services. New policies may need to be implemented to align resources with community
demands for service.
Outstanding Issues for FY 2006/07 Mid-Year Review
Contributing to the positive fiscal results last year were Town-wide expenditure reductions and
the cumulative effect of strategic defundings and restructurings that have been implemented in
the past four fiscal years.
The FY 2006/07 budget reflects a current and prior year staffing reduction total of 33.10
defunded and deleted FTEs made across all Town departments. The Police Department
continues to evaluate the viability of a new shift model, and expects to report its findings to
Town Council at a future date. Also underway is an assessment of maintenance services in the
Parks and Public Works Department. Under review with the department's participation is the
ability of the department to meet the current demands for maintenance services under the current
r
PAGE 4
MAYOR AND TOWN COUNCIL
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
DATE: November 6, 2006
level of resources and work methods. A goal of the assessment is to identify critical gaps in
service which may need to be addressed in the FY 2007/08 budget process.
FY 2006/07 AND BEYOND: CONTINUING CHALLENGES AHEAD
As discussed in detail on page 3 of the attached Budget Performance Report, FY 2005/06
concluded favorably from a financial point of view. However, staff remains very attentive to the
goal of preserving the Town's economic vitality. The most recent update to the Town's five-
year General Fund financial operating plan presented on the following page continues to project
potential revenue shortfalls that may develop in future years. However, the current update does
indicate two important points. The first is that the efforts the Town has accomplished in the past
four years have generated positive fiscal results in spite of a lingering soft local economy and the
closing of two automobile dealerships in FY 2005/06. Secondly, if recoveries continue in
economically sensitive revenues and service delivery costs are contained, the projected shortfalls
will be reduced accordingly. However, at this time in approximately three years downward
adjustments to the Town's operating budget are expected to be necessary to avoid the future
shortfalls forecast for FY 2009/10.
The updated Five Year Plan uses assumptions based upon estimated costs of labor and benefits
which represent approximately 70% of General Fund operating costs, and modest increases in
revenues associated with a gradual economic recovery from the downturns experienced in recent
years. The plan currently projects revenue shortfalls ranging from $485,000 to $606,000 in
future years that must be managed pro-actively by the Town. To address this, the Town is
continuing its multi-prong efforts to achieve operational efficiencies, cost reductions, reductions
in non-vital services, and revenue enhancement efforts to balance ongoing revenues with
expenditures in future years. As the budget tightens each fiscal year, the ability to reduce
operational expenditures without service impacts becomes increasingly challenging.
Departments review their operations on an ongoing basis for operating efficiencies, cost
containment, and overall best practices to meet the public's need for service. An analysis of fees
for cost recovery levels will also be undertaken as in years past. This information will be used to
develop the FY 2007/08 proposed budget for Council's consideration in Spring 2007.
The Five Year Forecast assumes that the State property tax swap or "back-fill" of approximately
$1.2 million in Car Tax for local property tax will continue to be implemented "permanently" in
each annual budget bill as promised by the State. Revenues are presented optimistically with
varying growth rates, on average 5% for tax revenues and 3% for charges for services.
Expenditures are derived from a database using actual costs and adjusting for future known
increases in labor costs if multi-year labor agreements are in effect, and actuarial updates for
retirement and other benefit costs as provided by PERS or other information sources available to
the Town.
Each of the years presented in the plan assume that adjustments made to the budget to eliminate
the revenue shortfall in FY 2006/07 and beyond are "permanent" adjustments, thereby reducing
the level of shortfall in the following fiscal years. It is possible to make some adjustments
PAGE 5
MAYOR AND TOWN COUNCIL
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
DATE: November 6, 2006
through one-time solutions or prudent use of bridge funding on a year-to-year basis. However,
problems that are truly structural should be addressed eventually with new revenue sources or
reduced expenditures in an ongoing way.
TOWN OF LOS GATOS - GENERAL FUND
Five Year Financial Plan FY 2007/08 Through FY 2011/12
Revenue Summary
ACTUAL ACTUAL ESTIMATED PROJECTED PROJECTED PROJECTED PROJECTED PROJECTED
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Sales Tax
$7,904,129
$8,655,566
$7,646,000
$7,875,300
$8,114,026
$8,354,900
$8,605,600
$8,863,800
Property Tax
5,302,061
5,831,822
$6,369,900
$6,614,200
$6,868,000
$7,131,900
$7,405,200
$7,624,100
Charges for Services
1920,356
3,006,634
$3,178,490
$2,889,400
$2,928,200
$2,970,000
$3,014,400
$3,061,200
Business Licenses
1,056,814
1,019,386
$1,000,000
$1,015,000
$1,030,200
$1,045,700
$1,061,400
$1,077,300
Car Tax/VLF Prop Tax Swap
1,554,932
2,096,704
$2,032,200
$1,935,900
$1,994,000
$2,053,800
$2,115,400
$2,178,900
Intergovernmental Rev.
2,316,962
2,606,356
$1,937,080
$2,111,585
$2,148,263
$2,191,350
$2,236,075
$2,282,576
Other Lie. and Permits
1,360,390
1,584,662
$1,522,500
$1,643,400
$1,675,000
$1,707,300
$1,740,200
$1,773,800
Investment Earnings
905,704
1,385,266
$1,205,700
$1,350,000
$1,404,000
$1,460,160
$1,518,566
$1,579,309
Franchise Tax
942,648
1,130,190
$1,013,500
$875,850
$902,700
$930,400
$959,000
$988,600
Hotel/Motel Tax
868,908
1,028,664
$930,000
$957,900
$986,600
$1,016,200
$1,046,700
$1,078,100
Fines & Forfeitures
580,937
210,888
$125,900
$464,500
$466,500
$468,500
$470,600
$472,800
Transfers & Use of Reserves
494,165
430,839
$972,385
$838,275
$838,275
$838,275
$838,275
$838,275
Miscellaneous
247,958
2,738,297
$188,700
$100,000
$100,000
$100,000
$100,000
$100,000
Total Revenues
26,455,964
31,725,274
28,122,355
28,671,310
29,455,764
30,268,485
31,111,416
31,918,760
Town Expenditures
Salary
11,415,065
11,439,231
12,521,800
12,960,063
13,413,665
13,883,143
14,369,054
14,871,970
Elected Officials
22,590
23,340
23,300
24,116
24,960
25,833
26,737
27,673
Temporary Employees
353,871
437,250
467,700
484,070
501,012
518,547
536,697
555,481
Overtime
494,170
542,624
391,500
405,203
419,385
434,063
449,255
464,979
Other Salary
572,258
571,011
193,700
200,480
207,496
214,759
222,275
230,055
Benefits
4,101,626
4,764,717
5,115,000
5,294,025
5,479,316
5,671,092
5,869,580
6,075,015
Supplies, Materials, & Services
3,256,678
3,287,777
4,257,820
4,385,555
4,517,121
4,652,635
4,792,214
4,935,980
Grants & Awards
177,578
178,359
181,415
186,857
192,463
198,237
204,184
210,310
Utilities
409,610
428,744
352,880
363,466
374,370
385,602
397,170
409,085
Fixed Assets
-
192,343
-
-
-
-
-
-
Internal Service Charges
2,820,428
2,849,969
3,057,900
3,149,637
3,244,126
3,341,450
3,441,693
3,544,944
Debt Service
930,710
932,122
931,080
931,800
931,850
931,850
929,050
932,100
Operating Transfers Out
182,876
67,673
309,550
-
-
-
-
-
GFAR Capital Transfers Out
75,000
475,000
318,710
150,000
150,000
150,000
150,000
150,000
Total Expenditures 24,812,461 26,190,160 28,122,355 28,535,270 29,455,764 30,407,211 31,387,909 32,407,593
Net Revenues Less Expenditures 1,643,503 5,535,114 136,040 (138,726) (276,493) (488,833)
Post Retirement Benefits - Governmental Accounting Standards Board Statement #45
Effective FY 2008/09, the Town will be required to fully accrue its actuarial determined liability
for post retirement benefits (the Town's contribution to retiree health care premiums) under the
provisions of the Governmental Accounting Standards Board (GASB) Statement #45. The Town
has historically budgeted and expensed these benefits on a "pay-as-you-go" basis, a standard
procedure for most local governments under generally accepted accounting principles.
Under GASB's new accounting standard, the Town is required to accrue a liability for the cost of
post-retirement benefits, using actuarial methods to estimate expected future costs for a
calculated portion of the current workforce that will retire under the Town's retirement benefit
PAGE 6
MAYOR AND TOWN COUNCIL
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
DATE: November 6, 2006
program. Assumptions will be made about the level of benefits and the number of eligible
employees who will eventually retire from the Town, offset by future accrued investment
earnings expected to be earned in a separate trust account that is usually established by local
governments to provide a funding account for these benefits.
Since the actuarial study is not yet completed, (the Town expects the study to be completed this
fiscal year) the Five Year Financial Plan may not accurately reflect benefit costs. With the
understanding there would be significant increases in future years, a 15% annual retiree benefit
cost increase was built into the Five Year Forecast, however until the study is completed true
liability estimates are unknown. Although accrued expenses will increase, actual cash payments
to retirees are expected to trend much as they have in the "pay-as-you-go" basis. The difference
between the accrued annual expense and the actual cash payments made annually by the Town
will be amortized over a phase-in period of approximately 20 to 30 years until the full annual
actuarial accrual of this expense is achieved. Until then, the difference between amounts set
aside by the Town and the actuarial liability will be booked at year-end either as a liability or
asset on the Town's financial statements. As a result of GASB 45, the Five Year Plan's future
updates will include potential increases to the annual expenditures for cash payments made to the
post retirement trust account used to fund post retirement benefits.
Conclusion
The Town has managed very effectively through the budget challenges in recent years.
Shortfalls were dealt with, priority services maintained, and General Fund contingency reserves
are intact. However, with the most current update to the Town's Five Year Financial Plan
indicating projected shortfalls beginning in FY 2009/10 the need to remain fiscally viable
continues to be a high priority for Town staff. The Town continues to communicate with
residents, staff, and the employee labor units to increase understanding of the Town's ongoing
fiscal challenges in order to engage all stakeholders on a continuous basis in seeking creative
solutions to delivering service in the context of our fiscal reality. Key goals are to minimize the
impact on Town services, maintain the community's quality of life, and remain a competitive
employer while sustaining the Town's fiscal health.
FORMAT OF THE REPORT
The attached Budget Performance Report includes a financial overview comprised of. a brief
discussion of the Town's financial condition; the FY 2006/07 financial outlook; a summary of
the performance of the Town's primary General Fund revenue sources and necessary budget
adjustments; and a look ahead at the FY 2007/08 budget process.
ENVIRONMENTAL ASSESSMENT:
This budget report is not a project defined under CEQA, and no further action is required.
PAGE 7
MAYOR AND TOWN COUNCIL
SUBJECT: FY 2006/07 FIRST QUARTER BUDGET PERFORMANCE AND STATUS
REPORT FOR THE PERIOD JULY 1, 2006 - SEPTEMBER 30, 2006.
DATE: November 6, 2006
FISCAL IMPACT:
The attached First Quarter Budget Performance Report includes a section providing a detailed
list of recommended expenditure and revenue budget adjustments recommended for the first
quarter of FY 2006/07. Upon approval of the recommended budget adjustments by Town
Council, the adopted appropriations for the fiscal year will be adjusted accordingly.
Attachments:
Budget Performance Report for the Three Months Ended September 30, 2006